Collecting Tax is about Political Will!

Politicians of all parties, from all countries, will tell you that there needs to beinternational agreement to deal with tax avoidance, tax evasion and tax havens. Yet there are more tax havens under UK jurisdiction than any other national jurisdiction, and we could start by putting our own house in order!

However, this doesn’t need to begin with tax havens, but could begin with tax relief on interest paid, a system currently being abused by British, multinational and trans-national companies. Interest paid by a company on loans is tax deductible – this is a hangover from the introduction of Corporation Tax in April 1965 by the Harold Wilson Government. Prior to this, companies and individuals were taxed at the same rates, and both were allowed tax relief on interest paid, which for individuals was mainly mortgage interest. Most people rented their accommodation then so it was the wealthier that benefited, so not much change there!!

The aim of the legislation was to reduce company tax and encourage investment, especially in the manufacturing industries – which still existed then! It’s doubtful if anyone back in ‘65 could have envisaged the ways in which such legislation would later turn the tax system on its head and benefit the already wealthy and still very greedy.

A case could, and still can, be made that interest paid on money borrowed for investment and, in particular, for capital investment in plant and machinery, should be tax deductible. But today in the UK, it is rarely about plant and machinery but about financial engineering. It might be legal, but is certainly not moral, and it is reducing tax receipts, which in turn gives the Government an excuse to tighten the screws of austerity. Three examples of financial engineering that highlight the problem are Boots, Heathrow Airport and Manchester Utd.

Boots, a timeless part of our High Streets, was a quoted company on the London Stock Exchange, with its head office in Nottingham where it started life as an apothecary in 1849. In 2007 Kohlberg Kravis Roberts (KKR), a US private equity fund, engineered an £11 billion leveraged buyout, and the head office moved to Zug in Switzerland.

The amount that KKR actually put in was £1.2 billion, and in 2012 they sold 45% of Boots to Walgreens, America’s largest chain of drug stores, nearly doubling their money. They received £2.2 billion (www.efinancialnews.com 26th April 2013) and they still owned 55% of the equity!!

In the tax year 2006/7 Boots profit was £455 million and tax paid was £131 million. But by 2007/8, profits of £535 million resulted in no corporation tax being paid. If KKR had borrowed the money and used it to buy Boots, then Boots would have carried on paying tax on profits. But the immorality is that the debt was loaded onto Boots’ balance sheet, and so became tax deductible. Since KKR took control, it is estimated by www.money.co.uk(20th May 2012) that by 2011 the amount of corporation tax avoided by Boots, whilst owned by KKR, was over £500 million.

London Heathrow Airport (LHR) was privatised as part of British Airports Authority (BAA) under Thatcher’s 1986 Airports Act. Subsequently, EU competition regulations saw the break-up of the old BAA, and Heathrow Airport is now a stand-alone company. BAA was taken over by the Spanish conglomerate Ferrovial in 2006, and today Heathrow is 33% owned by Ferrovial, 40% by the Sovereign Wealth Funds of Qatar, China & Singapore, and the rest by Alinda Capital Partners and CPDG, a Canadian Pension Fund. In 2011 the £570 million operating profit produced only £8 million in tax!! Yes, you’ve guessed it – the cost of the leveraged buyout was loaded onto the Heathrow balance sheet, and the interest disappeared into a tax haven.

It is the same with Manchester United. They have no liability for corporation tax now, because of the interest paid each year on the £500 million borrowed by the Glaziers to purchase the club in 2005, and its refinancing of 2010. Before the Glaziers arrived, United was debt-free.

What all three companies have in common is that the monies borrowed were loaded onto the balance sheets of the companies being purchased, with the loans and interest being repaid out of operating profits.

The reason given for privatisation is that it is more efficient than nationalised industries because of the discipline of the market. But Sovereign Wealth Funds are Government Funds, so why aren’t they considered inefficient? Oddly, it is only British nationalised industries that are deemed to be inefficient, not EDF, the ‘Big 6’ energy company, owned by the French Government, which also pays very little tax. Or even Arriva Trains, owned by Deutsche Bahn, which is the German Government, and is one of the 6 companies being asked to tender for Crossrail! These government-owned companies are certainly very efficient at not paying British Corporation Tax – in fact, just as efficient as the private sector!

Even worse and even more immoral but, incredibly, still legal is that a company can set up another company in a tax haven, put billions into that company and then lend it to the UK Company. The interest paid to the tax haven will offset the corporation tax liability from profits and the financial engineering and greed prevail. Some of these companies doing this are the utilities that were privatised, particularly the water companies (http://www.corporatewatch.org/?lid=4685) The price or water, gas or electricity has not gone down but the corporation tax paid has disappeared and this has a direct effect on the NHS, education, pensions etc.

How many other companies have loaded their balance sheets with debt to avoid paying tax? And how much tax is being legally avoided by these companies? Certainly, it is billions, but does the Government or the opposition know how much, and do they even care?

This financial engineering means that by not paying corporation tax, the taxpayer is subsidising private equity companies and wealthy individuals to make large amounts of money while there is austerity for 99% of the population. The Government likes to talk about dealing with welfare scroungers, but there are none bigger than the companies who financially engineer their balance sheets to avoid corporation tax.

It is absolutely clear that no international agreement is needed for the UK to correct this tax avoidance – just the political will to end interest on financially-engineered leverage buyouts being tax deductible. But that political will is sadly lacking. Why? Are the politicians in bed with the finance industry and big business? Sadly, it seems we live in a world where politics is just a part of the banking and finance industry, and politicians, especially those who have been in government, know that they can have a cushy sinecure when their political star wanes.

The mainstream media offers little criticism of this tax avoidance either – and for a similar reason – they, too, are controlled by ‘tax efficient’ media moguls who usually have a major say in setting the political agenda, both inside and outside the media itself. It is left to groups such as Occupy, UK Uncut, Tax Justice Network and others to try and campaign against this iniquity, but nothing will change until the 99% stand up to be counted!!!